Publication: AI Disruption Risk in Active Management - A Framework for Assessing External Manager Preparedness
Authors: Dr. Paul O’Brien, Kristian Flyvholm, Reza Mahmud, Dr. Guan Seng Khoo, Dr Massimiliano Castelli, Robert Bennett-Lovsey and Jeffrey Anderson.
Date: 9 March 2026
ABSTRACT: AI, particularly LLMs, multi-modal foundation models, and agentic systems, is currently driving a structural shift in investment management not seen since the rise of electronic trading and systematic investing. Its effects are already measurable, and its trajectory is accelerating.
Building on the Institute’s foundational work on integrating AI into investment frameworks (2025), this report takes the perspective of an asset owner evaluating an asset manager across fixed income, public equity, private equity, and hedge funds. Three findings frame the analysis.
The disruption risk is real and accelerating. AI now ingests, synthesises, and acts on information at speeds and scales that dwarf human capacity, and the competitive gap between early adopters and unprepared managers is already measurable.
The risk is not uniform. Liquid, data-rich markets face the most immediate disruption; private markets have a longer runway but are not immune.
AI readiness is now non-negotiable. Managers unable to articulate a credible AI strategy risk falling outside the investable universe for technologically sophisticated allocators.
The central challenge facing allocators is to incorporate an evaluation of AI skill into their monitoring and due diligence processes. This is essential because AI will disrupt the asset management industry. There will be winners and losers, and navigating among them will be an important driver of investment performance.
This monitoring is not easy. How can an allocator evaluate AI readiness among their managers, if the allocator themselves is not an expert in AI? Sovereign funds already have experience in allocating to complex and technical strategies. This experience can be applied to AI. In the analysis, the Institute of Sovereign Investors offers some guidance. Based on our experience we propose tools to assist allocators in building AI-resilient teams of external managers.
